Today's Trends in Credit Regulation

Municipalities are Increasingly Adopting Laws that Impose Requirements on Mortgages and Mortgage Servicers
By Shawnielle Predeoux

Since the foreclosure crisis began, several states have revised their foreclosure laws to require mediation prior to foreclosure and to permit municipalities to enact vacant property registration laws. As a result, municipalities have increasingly been adopting local laws that require a mortgagee or mortgage servicer to register and maintain properties that become vacant either upon default or after a foreclosure sale. The main purpose behind these local laws is to have a contact person who can be called to remedy code violations. The local property laws also are adopted to raise revenue to provide funds to pay contractors to perform work to remedy code violations. Some municipalities also have adopted ordinances that require mediation prior to foreclosure to help homeowners keep their homes. The city of Lynn Massachusetts recently adopted a comprehensive local law, the Lynn Homeowner’s Bill of Rights that incorporates both types of ordinances after the city council united to override the mayor’s veto of the proposal.

The Lynn Homeowner’s Bill of Rights requires the city to establish a mandatory mediation program that mandates participation by all mortgagees who send a notice of right to cure required by Massachusetts law. The mortgagee or mortgage servicer will be required to pay a mediation program fee that cannot be passed to the borrower. The right to cure notice must be sent to the city. The mediation process will start upon receipt of the right to cure notice or upon receipt of a mortgagor’s request for mediation that is made within 15 days of the borrower’s receipt of the notice. The mediation program will contain the following components:

  • The mediation program manager must schedule a mandatory mediation conference no later than 45 days after the borrower’s receipt of the notice of right to cure and provide notice of the scheduled conference to the parties;
  • The mediation program manager must send a second notice to the borrower if the borrower does not respond to the initial conference notice;
  • The borrower will have the option to attend a group orientation to learn about foreclosure alternatives, the foreclosure process, and the obligations of the mortgagee or mortgage servicer under the mediation program;
  • The borrower will be assigned a city-approved loan counselor if the borrower doesn’t have one prior to the scheduled conference;
  • Each party must attend the mediation conference or send a representative who can negotiate and agree on a foreclosure alternative;
  • A certificate of mediation completion will be issued by the mediation program manager if:
    • the parties can’t agree to a foreclosure alternative after a good faith effort is made in the mediation conference, or
    • The borrower fails to respond to the mediation program manager’s second request to appear for the conference;
  • The mortgagee or mortgage servicer can be assessed a $300 fine for each calendar day that the mediation requirements are not complied with for a loan up until the end of the 150 day cure period; and
  • The certificate of mediation completion must be filed with a non-judicial foreclosure deed or the deed will not be filed by the Southern Essex Register of Deeds.

The Lynn Homeowner’s Bill of Rights also establishes a comprehensive vacant property registration and maintenance program. In addition to the registration and maintenance requirements, the vacant property program requires a mortgagee or servicer to maintain liability insurance on the property evidenced by providing a copy of the certificate of insurance to the city and to provide a $10,000 cash bond on each property that will be used to offset any expenses the city incurs to correct a code violation.

Finally, the ordinance provides protections to any occupant of the property after a foreclosure sale. The occupant can be the borrower or a tenant. An occupant cannot be evicted after foreclosure, unless there is bona fide third party purchaser or there is just cause. Just cause includes the occupant failing to timely pay rent or occupancy charges, being convicted for using or permitting the property to be used for any illegal purchase, committing a nuisance, damaging the property, or refusing to provide the purchaser access to the property to perform maintenance or an inspection. Each violation of this requirement could result in a fine up to $300.

The Lynn Homeowner’s Bill of Rights is one example of a local law that encompasses many concepts to maintain property, protect borrowers, or protect tenants that are being adopted by various municipalities. The $10,000 cash bond requirement is a new approach that has been adopted by few cities. Springfield, Massachusetts was one of the first to require the cash bond and the requirement was challenged by banks in court. A U.S. District Court upheld the requirement.

Chicago, Illinois also recently adopted an ordinance to protect tenants. The Chicago ordinance requires mortgagees who purchase a property at a foreclosure sale or obtain the property through a deed in lieu of foreclosure to provide rent controlled leases to tenants that cannot increase by more than 2% in a twelve month period. If the option to renew or extend the lease is not offered, the mortgagee must pay a onetime relocation assistance payment of $10,600 to the tenant. The ordinance only applies to a tenant with a lease to occupy the property as the tenant’s principal residence. A tenant may not be the borrower or the borrower’s spouse, child, or parent. The mortgagee must also register the rental property with the Chicago Commissioner of Buildings within 10 days of the foreclosure sale or deed in lieu and pay a $250 registration fee.

Mortgagees and mortgage servicers should be aware of these ordinances so they know what is required within a municipality before incurring a penalty. However, this task may be difficult because some municipalities do not make their ordinances readily available online. Subscribers to the Mortgage Servicing CounselorLibrary database can access a list of vacant property registration and maintenance ordinances that is updated monthly. Otherwise, a mortgagee or servicer can call a municipality to inquire about the existence of an ordinance to determine if one exists.

Shawnielle Predeoux is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Shawnielle can be reached at 410-865-5425 or by email at

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